How to Identify Trading Channels — the Basics
Ascending channels appear to have almost perfect lines guiding their way up or down in price, which is always alluring to trade because it helps you anticipate future price movements.
First Find a Charting Platform
Finviz’s trendlines can help you find lots of them
Finviz.com is a popular website that you can use to help you screen stocks for your watchlist.
One of the best pages on their site that I frequently like using is their “News” tab, where you can scroll through stock charts in a side-by-side view along with various stats about their latest fundamentals and latest bits about the company in the news.
Make sure you’re not ‘imagining’ them
Trying to anticipate these patterns too early can get you into sticky situations…
Numerous times I’ve thought that I had identified strong channels to place trades in, only to realize that I had simply just “imagined” them as the pattern wasn’t in play long enough.
For example, TSM was recently in what appeared to be a descending channel, only to plow through resistance at the top of the channel and continue to gain in price:
Have clear enter & exit criteria (which you’ve hopefully back-tested)
Making sure that you have clear enter & exit criteria and are prepared for situations where the stock doesn’t perform as you intend it to will go a long way in ensuring that you have a successful strategy.
While entering criteria may be simple
On paper these strategies appear to be quite simple… for example, simply buying after a correction as the stock is near the bottom of the channel is a no-brainer, right?
Be prepared for the stock to continue an unfavorable move
Regardless of how confident you are that the stock will continue to follow the channel, always be prepared for the stock to trade in the opposite direction, and be prepared to close your position.
Or even stall halfway in the channel
Similarly, even if the stock begins to move up in price after correcting back down to the channel, the price may only move halfway up the channel, not even reaching the high-side of the channel, before it begins a move back down to test the bottom of the channel.
ORCL Ascending Channel Example
In ORCL’s latest chart, you can see how the stock tested support at the bottom of the channel multiple times:
Initially (mid-December ‘23), you wouldn’t have known that the stock was about to trade in a channel, and you would have had to wait a number of months for the pattern to get more defined.
You only started to see the true skeleton of the ascending channel after the stock tested resistance slightly above $130 and found itself unable to advance.
Taking a short position on this stock (or just getting puts) may not have been very obvious to a lot of traders at this point, believe it or not, simply because the stock had risen quite significantly in mid-March… surely the stock wouldn’t be falling so quickly after such a bullish move!
Only after the stock price descended across the entire channel did the stock finally begin to climb upwards again.
Herein lies the allures of the channel trading strategy… while simply finding what appear to be channels in stock charts can be quite easy, determining the criteria that you should follow for successful trades can be much more difficult.
While historical lookbacks are easy to do, it always appears “obvious” when you should be buying and when you should be selling. In “real life,” however, things get more complicated!
Happy Trading!
